Spread betting – Will Brexit drive the M&A market in the UK?

Before Britain voted on its membership of the European Union, a key theme was the question about whether it could remain ‘open for business’ in the event of Brexit. Leave, some argued, and Britain would cut itself off from the best of international trade.

But it seems the fears could have been misplaced, as mergers and acquisitions activity has appeared to perk up since the vote.

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ARM Holdings

 

SoftBank announced on Monday a £24bn takeover offer for Britain’s prized chip-maker ARM Holdings, whose products are found in virtually every smartphone around the world.

The Japanese conglomerate wants to pay £17 a share, which is 43% above where it closed on Friday night. It’s also about 50 times earnings before interest, taxes, depreciation and amortisation.

It comes after South African retail giant Steinhoff agreed a deal with Poundland to buy the discount group for £450 million. We’ve also seen US group AMC nab Odeon for £921 million.

While some expected that a Brexit vote would make UK firms prime takeover targets, few thought there would be this much activity so soon after the vote. It's clear that the collapse in the value of the pound has been important.

Weak Pound

 

The forex factor is key. Sterling has fallen sharply since the Brexit vote and the relatively weak pound makes British companies a lot more attractive to foreign corporates. GBPSUD has slumped from around $1.50 to trade around the $1.33 handle.

In the case of SoftBank’s move for ARM, the yen is about 30% stronger against the pound compared to a year ago.

As analysts expect the pound to remain weak, and potentially fall even further, we could see more purchases by foreign-based companies.

Corporate Bond Purchases

 

SoftBank’s move also reflects the extent to which large companies are awash with cash. Central banks are now even purchasing corporate debt and an increasing amount of this comes with a negative yield.

Billions of euros’ worth of short-term corporate debt comes with a negative yield in the secondary market. Deutsche Bahn recently became the first non-bank to sell a euro-denominated bond with a negative yield in the primary market – a sign of what’s to come if the ECB continues to snaffle up corporate paper.

With companies able to issue debt freely without cost – or even being paid to borrow by central banks – there could be a lot more big deals as firms look to use increasingly large piles of cash.

Uncertainty

 

Fears that the uncertainty around Brexit would kill off deals were oversold. Fundamentally, Britain remains one of the world’s largest economies and among the best places to do business on a global scale.

Access to EU markets will remain unfettered until the exit is negotiated, while the UK has the opportunity to push for better trade terms with a host of non-European countries in the meantime.

The UK is very much open for business as these deals show. With a weak pound making UK assets relatively cheap, more are likely to follow.